Download Federative Republic of Brazil - Secretaria Do Tesouro Nacional

MINISTRY OF FINANCE
National Treasury Secretariat
BRAZIL: RECENT CHANGES IN MONETARY
AND FISCAL POLICIES
Fabio de Oliveira Barbosa
Secretary of the National Treasury
Treasury Management in Latin America
EuroFinance Conferences
Miami, April 2002
Brazil: Recent Changes in
Monetary and Fiscal Policies
1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System
4. Outlook
Brazil: Macroeconomic Framework
 The Real : 8 consecutive years of stable economic environment, in
spite of several international crises (Mexico, Asia, Russia, Argentina)
 Remarkable transition to the floating exchange rate regime:
– GDP growth;
– New BOP profile:
# Declining current account deficit : USD 23 billion (2001) from USD 34 billion (1998);
# Large FDI flows financing C.Account deficit: USD 22,6 billion (2001)
 Inflation Targeting Framework: building a strong track record
 A New Fiscal Regime in Place:
- Since 1998, an impressive shift in primary flows was delivered;
- Structural reforms:
. Privatization
. Administrative Reform - Social Security Reform
. States and Local Governments´ Refinancing Agreements
. Fiscal Responsibility Law
Macroeconomic Framework
July, 1994: Exchange rate as the nominal anchor; targeting monetary aggregates.
January, 1999: Inflation targeting framework; floating exchange rate regime.
GDP Growth: 1990 - 2002*
6.600
6,0
6.400
4,0
6.200
2,0
6.000
0,0
5.800
5.600
-2,0
GDP Growth Rate
* estimate
2002*
2001
2000
1999
1998
1997
1996
1995
1994
-6,0
1993
5.200
1992
-4,0
1991
5.400
Real Growth rate ( %)
8,0
GDP Per Head
1990
R$ per head (2000)
6.800
Current Account vs. Foreign Direct Investment
1994/2001 ( US$ Billion)
Despite the adverse international scenario, FDI flows have remained strong,
virtually financing a sharply reduced Current Account Deficit.
40
35
30
25
20
15
10
5
0
1 9 94
19 95
1 99 6
FDI
1 99 7
19 98
19 9 9
C u rr e n t A cc o u n t ( d e f ic i t)
2 00 0
2 0 01
Brazil: A New Fiscal Regime
Primary targets met for 13 consecutive quarters...
P r im a r y R e s ults - P ub lic S ec to r
4 ,0
% GDP
3 ,0
2 ,0
1 ,0
0 ,0
D e c /9 5
D e c /9 6
D e c /9 7
De c /9 8
D e c /9 9
D e c /0 0
-1 ,0
-2 ,0
A c tu al
T arg e ts
In 1998 the target referred only to the Central Government (0,55%GDP) and it was also met
D e c /0 1
... together with much better distribution of the fiscal effort.
3,03
2,50
2
1
1,19
0,32
-1
0,21
0,70
-0,31
0
deficit
2,84
3
%GDP
surplus
4
dez/98
dez/99
dez/00
Central Government Regional Government
Source: Central Bank
dez/01
The increase of net public sector debt reflected not only
the fiscal policy and the domestic and international
economic environment in the last 8 years...
60
53,1
43,3
%GDP
40
30
20
10
54,5
49,7 49,4
50
Total
29,9
28,1
33,4
34,6
32,7
30,4
31
12,1
13
9,4
6,6
10,4
6,5
0
1994
1995
* February
33,9
26
18,8
15,9
11,6
5,9
1996
13
2,8
1997
14,7
2,7
1998
16,4
2,8
1999
16,2
2,2
2000
Central
Government
18,5
2,0
2001
States and
Municipalities
18,5
State-owned
enterprises
2,1
2002*
... but also decisive actions towards fiscal transparency,
Contingent Liabilities vs. Privatization - Accumulated Results
9,2
%GDP
10%
5%
0%
1998
1999
2000
2001
Contingent liabilities Privatization
Source: Central Bank
8,3
Structural Reforms:
The Fundamentals of a New Fiscal Regime
– PRIVATIZATION: USD 100 billion in the last decade
 Public debt amortization;
 Elimination of potential deficits (capitalization, subsidies);
 Important role in FDI flows;
 Productivity and efficiency gains;
 New players in domestic capital markets.
Structural Reforms:
The Fundamentals of a New Fiscal Regime
Administrative Reform:
– Elimination of general job tenure;
– Flexible legal regime for civil servants;
– Legislative/Judiciary: Salary increases must be approved by Congress.
Social Security Reform:
–
–
–
–
“Time of Service” replaced by “Time of Contribution”;
“Benefit Adjustment Factor”: link with minimum age requirements;
Elimination of the partial benefit at early retirement;
New regulatory framework for pension funds; public sector contribution as
sponsor : parity with employees´;
– Additional effort: Retired civil servants contribution-Constitutional Change
Structural Reforms:
The Fundamentals of a New Fiscal Regime
State & Municipalities Refinancing Agreements: closing of traditional
“loopholes”
– 25 out of 27 states, 180 municipalities; US$ 130 billion program; no
arrears;
– Main Aspects:
 Debt Service Ceiling = 13% of Net Current Revenue (NCR);
 Debt Stock Ceiling equivalent to 100% of NCR;
 Fiscal Programs, annually revised : Targets for primary surplus, payroll, total
debt;
 Multi-annual Debt/NCR targets; no “new money” while Debt/NCR > 1;
 Implementation of Privatization Programs: 30% total results;
 State Banks: privatization, closing, transformation into development agencies
(BANERJ, BEMGE, CREDIREAL, BANESPA);
 Incentives to the establishment of balanced pension funds (RJ, PE, PR).
Structural Reforms:
The Fundamentals of a New Fiscal Regime
Fiscal Responsibility Law
 Art.35: No more refinancing between different levels of government;
 Budget Guidelines Law (LDO): 3-year targets for fiscal policy;
 Allows for expenditure cuts in other branches of government;
 Debt ceilings for the three levels of government
 No budget commitment without effective funding;
 Transparency: reports on fiscal management, budget execution,
relationship between the Treasury and the Central Bank.
Macroeconomic Framework
 In sum, Brazil has overcome major challenges in the last few
years:
- Several deep international crises;
- Successful transition to a new set of policies: inflation targeting framework;
- Gradual Improvement of External Accounts;
- Implementation of a NEW FISCAL REGIME:
# comprehensive structural reform agenda;
# primary surpluses over 3% of the GDP since 1999.
Sound macroeconomic policies are giving room to:
– A more proactive public debt management approach, and
– Development of the domestic capital markets.
Brazil: Recent Changes in
Monetary and Fiscal Policies
1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System
4. Outlook
BRAZIL: Debt Management &
Domestic Capital Market Development
THE BRAZILIAN NATIONAL TREASURY: A KEY ROLE
– The largest securities issuer;
# Debt strategy as a reference for market participants;
# Central Bank no longer a primary issuer.
– The largest equity holder:
# Privatization;
# Public offering of minority shares.
BRAZIL: DEBT MANAGEMENT STRATEGY
Predictability, Transparency, Simplicity
– Focus on Domestic Capital Markets
Objective: Cost minimization in the long-term, prudent risk levels considered.
Guidelines:
# Refinancing risk at safe levels;
# Gradual reduction of market risks:
* Short term interest rates; exchange rate; Increasing share of fixed-rate instruments
# Consolidation of the domestic yield curve:
* fixed-rate: firm bid offer for long-term securities; regular auction for indexed bonds;
# Standardization of debt instruments: Domestic exchange-offers; fungible instruments;
# ALM Framework
Brazil: Debt Management Strategy
External Debt
– Brazil: Predictable, regular but moderate borrower;
– Consolidate Brazilian yield curves in strategic markets (USD, EURO,
YEN) with liquid benchmarks;
– Pave the way for other borrowers to access long term financing, not yet
available in domestic capital markets;
– Broadening of the investor base in Brazilian risk; role in FDI/privatization;
– As market conditions allow, gradual retirement of restructured debt.
Recent Developments: Domestic Debt
REDUCING REFINANCING RISK
- improved debt profile
- gradual increase of the average life
- focus on short term maturities (up to 12 months)
- cash management
Lengthening of the Average Maturity
% of Total Domestic Debt Maturing in 12 Months
37
53
48
43
38
31
33
28
28
Feb/02
Dec/01
Oct/01
Aug/01
Jun/01
Apr/01
Feb/01
Dec/00
Oct/00
Aug/00
Jun/00
Apr/00
Feb/00
Feb/02
Dec/01
Oct/01
Aug/01
Jun/01
A pr/01
Feb/01
Dec/00
Oct/00
A ug/00
Jun/00
A pr/00
Dec/99
23
25
Feb/00
months
34
Recent Developments: Domestic Debt
Great variety and flexibility to deal with distinct macroeconomic environments
80%
70%
60%
55.22
50%
40%
30%
28.70
20%
8,57
10%
Fixed Rate
Exchange Rate
Price Index
Feb/02
A ug/01
Apr/01
Jun/01
Feb/01
Oct/01
Dec/00
Jun/00
A ug/00
Apr/00
Feb/00
Oct/99
Dec/99
Jun/99
A ug/99
Feb/99
A pr/99
Dec/98
Oct/98
Jun/98
A ug/98
Feb/98
A pr/98
Oct/97
Dec/97
Aug/97
Feb/97
A pr/97
Dec/96
Jun/97
Floating Rate
Oct/01
Dec/01
7,50
0%
Effective Steps Towards Capital Market Development
ENHANCING TRANSPARENCY:
. Disclosure of the Treasury´s Annual Borrowing Plan
. Monthly schedule for Treasury auctions; reduced auction events;
. Incentive to electronic trading systems;
. Regular meetings with dealers, institutional investors and rating
agencies;
. Standardization of debt statistics (methodology/ nomenclature).
. Code of Conduct for Public Debt Managers;
Effective Steps Towards Capital Market Development
(cont´d)
IMPROVING OPERATIONAL PROCEDURES:
. Firm bid
securities;
(price-discovery)
auctions for
long-term
. Reoffer and buy-back mechanisms;
. Domestic Exchange ( maturity lengthening, standardization)
. Fungibility; standardization of debt instruments;
. Dealers: Market makers.
fixed-rate
Effective Steps Towards Capital Market Development
(cont´d)
TREASURY DIRECT PROGRAM: Main objectives:
 Direct access to Treasuries through the Internet; reduced minimum investment;
 Incentive to long term saving;
 Spread information about public debt;
 Features:
- Brazil is one of the few countries in the world where this option is available;
- Settlement through financial institutions;
- Pricing: according to market rates.
 Main Statistics Since Start Up (January,2002)
- Over 3.000 investors; 155 cities, 24 states;
- 31% of total transactions under US$ 400;
- Average investment: US$ 3.600; minimum US$ 70.
Effective Steps Towards Capital Market Development
 Consolidation of the Financial System
– PROER, PROES, Federal Institutions (BB, CEF, BNB, BASA)
 Successful Public Offerings: PETROBRAS, CVRD
– Development of a vast investors base in domestic markets (over
700 thousand investors bought CVRD shares);
 New Market: Tag Along, US GAAP, Ordinary shares.
 New Corporate Law: Shareholders rights enhanced;
 Direct incentives towards good governance (CVM, BNDES)
 CVM (Brazilian SEC): Formal legal and operational autonomy.
Brazil: Recent Changes in
Monetary and Fiscal Policies
1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System
4. Outlook
The New Brazilian Payment System
Brazil already has one of the most solid Payments System around the world.
However, improvements are required: major part of the payments is done without
guarantees; final settlements with a one day lag.
The new Brazilian Payment System (to be implemented in April 22, 2002) has the
following objectives:
Reduce systemic risk; Central Bank no longer bearing the risk;
Increase settlement efficiency;
Enhance secondary market liquidity for debt instruments;
Incentive to more competitive financial services; and
Potential increase of domestic credit supply.
Main Advantages of the New
Brazilian Payment System
– Expected Results:
Private Risk within Private Sector;
Financial System: Further Strengthening;
Cost reduction for financial transactions;
Lower Credit Risk;
Development of new products/electronic transfers;
Brazil: Recent Changes in
Monetary and Fiscal Policies
1. Macroeconomic Framework
2. Debt Management & Domestic Capital Market Development
3. The New Brazilian Payments System
4. Outlook
OUTLOOK
More favorable international scenario is prevailing:
– Stronger than anticipated US economy´s performance;
– European economies: gradual recovery
– Improved perspectives for international liquidity;
– Oil prices: some volatility;
– Latin America:
# Argentina: limited effects in 2002;
# Mexico,Chile: good growth perspectives
# Political issues.
OUTLOOK
BRAZIL:Economic Indicators (Average Market Expectations)
2002
GD P %
IPC A %
C .A c c .(U S D)
FD I (U S D)
– as of early April, 2002
2 ,4
5 ,2
20 ,3
17 ,2
2003
3,5
4
20 . 0
18 . 0
OUTLOOK
FISCAL POLICY:
2002: 3,5% Primary Surplus is being delivered as expected;
2003 to 2005: Target = 3,5% of the GDP (Budget Law)
* At least 7 consecutive years of strong fiscal performance
MONETARY POLICY: shocks managed over a reasonable timeframe;
DEBT MANAGEMENT & DOMESTIC CAPITAL MARKETS
 Sustain current public debt rollover risk:
# Average maturity around 3yr; # Short term below 29% of total debt.
 Further duration increase : 15 months by year end;
Banco do Brasil: New Market; Public offering in 2002.
MINISTRY OF FINANCE
National Treasury Secretariat
BRAZIL: RECENT CHANGES IN MONETARY
AND FISCAL POLICIES
Fabio de Oliveira Barbosa
Secretary of the National Treasury
Treasury Management in Latin America
EuroFinance Conferences
Miami, April 2002